“It’s
so easy when you know the rules,
It’s so easy all you have to do,
Is fall in love.
Play the game” – Queen, Play The Game

Digital media is hot. Over $4B in Venture Capital in
2006 was invested in the broad category of digital media
(everything related to digital entertainment from social
networking to digital music to semiconductors).
Included in the broad category of digital media is the
video game industry, which is especially important in
this neck of the woods.

In breaking down the digital media investment to content
creation, it looks like the jump in investment in
companies related to creating digital content (read:
games) went from US$300M in 2005 to US$725M in 2006.
Now this space gets even more exciting when you consider
that venture investment in pure content creation has
been very low for over a decade and is a poor indicator
of how well the sector is actually doing. Game
development is seeing a huge resurgence due to the
trifecta of console releases in late 2006 and early 2007
(new Xbox 360, PS3 and the Wii). The broad video game
business (including mobile, web based, etc.) is
somewhere around $30B a year, with the games being about
$15B of that. Happy talk prognosticators see this
reaching $80B in five years driven by the demographics
of gaming.

To wit, folks my age were the first gamers. We played
Pong, Intellivision and Atari in our youth. We are now
over forty (some of us very recently… thanks for the
cards), and still into gaming through on-line casual
games. We are getting more free time as our kids age
and we are getting our kids all of the latest consoles.
We will spend more time gaming over the next twenty
years as we spend less time raising kids. Then there is
the Nintendo generation right behind us. These are the
25-35 year olds that grew up on Nintendo and Sega. They
are the hard core gamer generation and are all playing
World of Warcraft and Second Life at the moment. But
their time is getting crunched, so they are looking for
less “time-sucking” games as they get busy having
families. Finally, there is the new game generation.
They all have cell phones, they understand social
networking and they play games. They are getting older
and are starting to get jobs over the next few years.
More disposable income means more revenue.

As I sat at the first Digital Fusion Forum, held by New
Media BC this week, I pondered the local video game
scene and thought about some of the up and comers here
that might make it big in this new boom for games. We
have the impressive legacy of Distinctive, Radical,
Black Box and Relic which became Electronic Arts
Burnaby, Vivendi, Electronic Arts downtown and THQ
respectively. These huge studios are employing over
2,500 and cranking out some of the best games in the
world. But what about the start-ups, the new kids on
the block that are looking to take advantage of not just
the boom in gaming, but the changes to the gaming
industry that are afoot? Who are they?

In the classic video game studio genre (making games for
consoles or handhelds or the PC and selling them through
familiar distribution), two local companies I have met
are doing very well. Next Level Games
www.nextlevelgames.com (disclosure: my younger
brother works for them) is a four year old company that
made the huge hit (over 1.3M units) Super Mario Strikers
for the Nintendo platform only. They have many other
projects under their belts and are around 100
employees. The Mario Strikers game was a coup as they
became the only studio outside of Japan to ever make a
Nintendo game using the signature Mario characters.
This goes to show the level of talent that they have as
Nintendo does not entrust the core characters to just
anyone. Another bright light is Deep Fried
Entertainment
www.deepfriedentertainment.com. They are a more
recent start-up focusing (for now) on the handheld
gaming market. I saw their first effort and I am not
sure I am allowed tell you what it is. But safe to say
it will be an impressive game when released. They are a
very talented bunch and appear to have a competent
strategy going forward.

The biggest change to the industry in the next few years
will be the digital distribution model. In five years,
you will not be shopping at Future Shop for your video
games… they will be downloaded to your console or PC.
Another big change, which I alluded to in the
demographics discussion above, will be the emergence of
high quality games that don’t take 12 hours of
continuous game time to complete. As the hardcore
generation has less time to devote to gaming, the
shorter, but still high quality, gameplay will be huge.
This leads to episodic games that deliver monthly or
quarterly segments, similar to comic books.

Local companies looking to take advantage of these
changes include Hothead Games
www.hotheadgames.com, Jarhead Games
www.jarheadgames.com and Klei Entertainment
www.kleientertainment.com. All three of these
companies started with teams that left the larger video
game studios and all three wanted to make games in a
less expensive manner yet deliver quality experiences.
Jarhead takes the episodic or “smaller” game theory to
existing genres like first person shooter games. The
art and game play are familiar, you just get a quicker
game and pay less. They are doing very well working
with this model. Klei is focused on the Xbox Live
Arcade where games are on display and downloaded for
play for a lot less money than a game from Future Shop.
They have their ticket into the select few companies
that are available in Live Arcade and are making
episodic games that repeat characters but change the
game play. Finally, Hothead is focusing on independent
type content to make episodic gaming. They refer to
themselves as the HBO of video games whereby they use
cult content (like Penny Lane Comics) to make their
games as opposed to large ticket licenses like Harry
Potter. All of these companies are looking to take
advantage of digital download as a way of increasing
their own cut of the final sale to the consumer.

Advertising and marketing are changing dramatically in
our on-line, mobile world. TV is not as lucrative for
advertisers as it used to be because we are entertaining
ourselves through other media, including gaming. Two
local companies are inserting themselves at the leading
edge of a new trend for companies to increase their
brand awareness and get their message to the new media.
Three Wave Software
www.threewavesoftware.com is a multiplayer world/map
company for first person shooter games. They add new
exciting levels for gamers to download for the most
popular multiplayer games. They get paid by doing deals
with large brands to be inserted into the world. Just
as the movies started doing marketing “placement” with
Will Smith wearing Oakleys, etc., the gaming market has
figured out how to insert brands into games. Google
just bought Adscape, a company doing the ad placement in
games as a service. Microsoft bought Massive late last
year to do the same thing.

Shift Control Media
www.shiftcontrolmedia.com is a very new company that
looks to take the branding and marketing message of
large corporations one step further than Three Wave.
They make games around the brand and marketing message.
These aren’t silly little Flash animations that you see
today, but are actual video games, either downloaded or
bought in store that are built for the brand. It is a
fascinating concept when you consider that a highly
targeted free or very cheap game with interesting
gameplay has already been a success for large companies
like Burger King.

At the edge of gaming, rapidly converging with it due to
the success of massively multiplayer games, are the
social networks or communities that are focused on
entertaining. Two BC companies worth mentioning here
are poised to be huge players by picking a targeted
demographic and delivering very interesting original
content. Horizon Interactive in Kelowna has created
Club Penguin
www.clubpenguin.com (which if you have a 7 to 10
year old, I highly recommend) and it is a runaway
success. A community focused on bringing kids together
to do fun games and interact is only as good as it is
safe. Horizon has focused on safety which makes parents
breathe easier. They have a free version and a monthly
subscription. The subscription allows the user to
accumulate winnings from the games they play and trade
it in for furniture and accessories for their igloo
and/or clothes for their penguin. Well, the jealousy of
a 9 year old girl seeing a tricked out igloo her friend
has usually leads to the parent signing up.

Rip.TV
www.rip.tv is a community site for extreme sports
that makes its own high quality material as well as
aggregating other material around the subjects that they
cover. They have only been launched for a few months,
but are serving up a million video streams a month
already. They have a great strategy of delivering free
high quality content which will drag the highly
interested under 30 male away from the grainy cell phone
camera YouTube type content. It seems to be working.

I have had the opportunity to meet with or talk to the
CEOs of these companies and they are pumped. I am sure
there are others out there looking to cash in on the
boom in digital media from our neighbourhood. We are
rich in digital media talent and ideas here and this
sector is certainly one that will be key to our
technology industry success.

Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
myself, thanks).